What the heck is "sell short"???????

Question

Can someone please explain it to me in laymans terms, I've read everywhere but I dont understand it, Is it related to "buy to cover" which I dont understand either. . .

Answer 1

Say that stock XYZ was selling at $20 a share. Say you heard that workers at the main factory at XYZ were going on strike and the news was it would be a long strike. Most brokerage accounts allow a feature to "short" a stock. The brokers are custodians of lots of stocks from lots of customers, so if I "sold 100 shares of XYZ short" my broker loans me 100 shares of the stuff just sitting around on their books (in more distant times it was a physical piece of paper, a certificate, that physically changed hands, part of why brokerage trades used to be so expensive). This block of stock is sold on the market (the price of the stock has to be up, or the uptick--think about a basketball last possession pointer) for, in this example $20 ($2000, less commissions and fees). During the strike or whatever, the price of the stock falls to $10 a share. Not being too greedy, you then buy the stock back ($1000, less commissions and fees). This is covering the trade, the stock goes back to where it was and all is well with the world--especially since you effectively spent $1,000 for a $2,000 stock and got to keep the $1,000 profit. Of course, things can go the other way, and you will have to cover the short sale at a loss--stories of impending strike were wrong, an advantagous contract were signed and the stock went from $20 to $30. In that opposite case, you got $2,000 for the borrowed shares that you sold, but have to buy them back at $3,000, so you just lost $1,000 plus commissions and fees.

Answer 2

You will short the stocks when you expect that the stock price will fall in the near future with a specific time. When the time comes, if your shorted stock prices has fallen, you gain the profit. It is like you have buy the stocks at the fallen price at that specific due time and sell to the current price when you sell short the stocks. Eg You short the stock at $2 now and the price has fallen to $1 at that specific time. Means you earn a dollar profit.
Buy to cover is like a insurance to protect your stock value. You will not get to lose the all the value of your stocks when its fallen.

Answer 3

you're in effect selling stock that you do not own. you will have to buy it before the due date and you hope it is cheaper than you sold it for. if i were to contract with you to sell you stork on 12/12/07 for $5 per share but i do not own any stock i would be selling short. what i hope for is that at some point between now and 12/12/07 i can buy the stock for less than $5. win some lose some

Answer 4

You sell a stock you don't own in the expectation that the price paid will fall in the time between putting in the Sell order and when you have to settle the deal - 3 days later - you buy the stock at the lower price to settle the deal and pocket the difference.

Answer 5

Selling short is borrowing stock that you don't own and selling it. Needless to say, you are obligated to buy it back at some point and return it. Also brokers have margin requirements that require you to keep enough money in your account to buy back any stock you've shorted, so you can't just take the money and run. Buy to cover is short for buy to cover a short position. It is buying to return stock you've shorted (borrowed), as opposed to buying stock for yourself.